“We’re out of step with the rest of the world,” Camp, a
Republican from Michigan, said today in an interview with
Bloomberg Television. “We need to move to this territorial
system, which allows our companies to not be double-taxed.”

The proposal will be released later today as a draft
instead of as a formal bill, according to a Republican familiar
with the plan. It’s a slice of the broader rewrite of individual
and corporate U.S. tax laws Camp is seeking. Still, the release
marks the first time he has made a detailed proposal on an
overhaul of international tax law since he took control of the
Ways and Means panel in January.

“It seems to be a European-style territorial tax system,”
said Rosanne Altshuler, an economics professor at Rutgers
University in New Jersey who has written extensively on
international tax policy.

With the 95 percent exemption, companies would pay taxes on
5 percent of their profits earned overseas. That would let the
U.S. avoid writing detailed rules for disallowing domestic
deductions that support untaxed foreign operations.

Lower Corporate Rate

The proposal assumes the top corporate rate will be lowered
to 25 percent from its current 35 percent and would also be
revenue-neutral. Camp’s plan would in part offset the
undisclosed cost of the territorial plan by requiring companies
to repatriate offshore profits at a 5.25 percent rate within
eight years.

Under the current U.S. worldwide tax system, multinational
companies with headquarters in the U.S. owe taxes on profits
they earn outside of the country. They receive tax credits for
payments to other governments and can defer the residual U.S.
tax until they bring the money home.

The U.K. and Japan have moved to territorial tax systems in
recent years, leaving the U.S. system as an outlier.

Democratic Resistance

Camp’s plan will face resistance from some Democrats, who
have argued that lower taxes on overseas operations would
encourage companies to move operations and profits out of the
U.S. When President Barack Obama campaigned in 2008 against tax
breaks that ship jobs overseas, he was talking largely about
deferral under the current worldwide system.

A territorial tax system, depending on how it’s designed,
could be another step in that direction. The features of such a
system can affect its impact on companies, and that’s why
lobbyists and lawmakers were awaiting Camp’s draft.

Representative Sander Levin of Michigan, the top Democrat
on the Ways and Means Committee, said Camp’s territorial tax
plan “has to be more than a slogan.”

“We have to say how are we going to avoid tax havens, use
of them, how are we going to avoid shifting manufacturing
overseas?” he said today on CNBC. “Are we going to get rid of
some of the incentives today that help promote manufacturing in
the United States of America? We need to answer those
questions.”

‘Just the Reverse’

Camp said a shift to a territorial tax system wouldn’t
encourage U.S. companies to move investments offshore.

“It’s just the reverse,” he told Bloomberg Television.
“The rest of the world has gone to a lower corporate rate and a
territorial system of taxation. So our employers are really at a
competitive disadvantage when they try to do business around the
world.”

Because U.S.-based companies can now defer taxes on
overseas income, many have built up stockpiles of offshore
profits, and the total parked overseas exceeds $1 trillion. Some
of those companies, including Pfizer Inc. (PFE), Cisco Systems Inc. (CSCO)
and Apple Inc. (AAPL), want Congress to let them return the profits to
the U.S. at a reduced rate.

They have formed a coalition to lobby lawmakers to support
a temporary tax repatriation holiday. Camp has resisted their
calls and has insisted that the offshore profits be returned as
part of a comprehensive tax-code overhaul.

Repatriation Provision

Camp’s plan includes a so-called deemed repatriation
provision that wouldn’t require companies to return the profits
to the U.S. It would require them to pay taxes at a 5.25 percent
rate as if they had returned the profits.

Because a temporary tax holiday wouldn’t change the
underlying system, the congressional Joint Committee on Taxation
estimates that it would cost the U.S. almost $79 billion in
forgone revenue over a decade. By incorporating repatriation of
overseas profits into the territorial plan and making it
mandatory, Camp’s plan would generate revenue to help pay for
the cost of shifting to a territorial system. It doesn’t cover
the cost of reducing the corporate rate to 25 percent.

Congressional scoring rules won’t calculate whether the
proposal would lose money after a decade. The temporary proceeds
from deemed repatriation could dry up after eight years and make
the second decade of Camp’s proposal a revenue-losing tax cut.

Capitalization Rules

If the U.S. moves to a territorial system, there will be
concern that companies could use debt -- the interest on which
is tax-deductible -- to finance overseas operations that are no
longer subject to U.S. tax. Camp’s proposal will include thin
capitalization rules to prevent a company from becoming too
leveraged in the U.S.

Some aspects of the proposal reflect issues that must still
be worked out. For instance, lawmakers must decide how to treat
income from intangible assets such as patents. One of three
options Camp is offering would be a 15 percent tax on royalty
income that would be levied when earned, regardless of location.

Companies in the pharmaceutical and technology industries
have been able to move intellectual property out of the U.S. and
into low-tax jurisdictions such as Ireland.

Camp is a member of the congressional supercommittee that
is charged with identifying $1.5 trillion in savings over a 10-
year period by Nov. 23. The panel has considered including a
framework for a tax overhaul in its report. Those plans could be
affected by Camp’s proposal.